UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended September 30, 2015

 

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

 

Commission File No. 333-133624

 

WHERE FOOD COMES FROM, INC.

(exact name of registrant as specified in its charter)

 

Colorado	43-1802805
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

 

221 Wilcox, Suite A

Castle Rock, CO 80104

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code:

(303) 895-3002

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a small reporting company. See definitions of “large accelerated filer” and “accelerated filer” and “smaller reporting entity” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer:	☐		Accelerated filer:	☐
Non-accelerated filer:	☐		Smaller reporting company:	☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐   No  ☒

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of October 26, 2015, was 23,813,295.

 

 

 

 

Where Food Comes From, Inc.

Table of Contents

September 30, 2015

 

Part 1 - Financial Information
Item 1.	Financial Statements		3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		16
Item 4.	Controls and Procedures		22
Part II - Other Information
Item 1.	Legal Proceedings		22
Item 1A.	Risk Factors		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 6.	Exhibits		22

  

 

 

 

 

 

 

Where Food Comes From, Inc.

Condensed Consolidated Balance Sheets

  

 

		September 30,				December 31,
		2015				2014
Assets		(unaudited)
Current assets:
Cash and cash equivalents		$	3,985,277			$	2,583,058
Restricted cash			—				250,000
Accounts receivable, net			1,083,566				979,532
Prepaid expenses and other current assets			137,808				126,938
Deferred tax assets			240,805				167,805
Total current assets			5,447,456				4,107,333
Property and equipment, net			180,187				231,886
Intangible and other assets, net			1,798,967				1,952,678
Goodwill			1,279,762				1,279,762
Deferred tax assets			86,647				361,797
Total assets		$	8,793,019			$	7,933,456
Liabilities and Equity
Current liabilities:
Accounts payable		$	581,118			$	401,131
Accrued expenses and other current liabilities			273,927				65,849
Customer deposits			90,272				69,090
Deferred revenue			195,722				178,724
Short-term debt and current portion of note payable			7,739				7,425
Current portion of capital lease obligations			4,574				4,397
Total current liabilities			1,153,352				726,616
Capital lease obligations, net of current portion			2,958				6,410
Notes payable and other long-term debt, net of current portion			10,376				16,245
Total liabilities			1,166,686				749,271
Commitments and contingencies
Contingently redeemable non-controlling interest			901,435				974,019
Equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued or outstanding			—				—
Common stock, $0.001 par value; 95,000,000 shares authorized; 23,813,295 (2015) and 24,266,827 (2014) shares issued, and 23,813,295 (2015) and 23,720,130 (2014) shares outstanding			23,813				24,266
Additional paid-in-capital			7,412,523				7,428,754
Treasury stock of 0 (2015) and 546,697 (2014) shares			—				(150,849	)
Accumulated deficit			(711,438	)			(1,092,005	)
Total equity			6,724,898				6,210,166
Total liabilities and stockholders' equity		$	8,793,019			$	7,933,456

 

The accompanying notes are an integral part of these financial statements.

 

 

Where Food Comes From, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
		Quarter ended
		September 30,				September 30,
		2015				2014
Revenues:
Service revenues		$	2,655,792			$	2,139,330
Product sales			371,699				414,515
Other revenue			25,417				25,580
Total revenues			3,052,908				2,579,425
Costs of revenues:
Labor and other costs of services			1,362,800				1,134,043
Costs of products			216,298				265,740
Total costs of revenues			1,579,098				1,399,783
Gross profit			1,473,810				1,179,642
Selling, general and administrative expenses			1,171,513				775,020
Income from operations			302,297				404,622
Other expense (income):
Interest expense			380				3,705
Other income, net			(2,242	)			(932	)
Income before income taxes			304,159				401,849
Income tax expense			92,000				143,940
Net income			212,159				257,909
Net income attributable to non-controlling interests			(30,549	)			(12,823	)
Net income attributable to Where Food Comes From, Inc.		$	181,610			$	245,086
Net income per share:
Basic		$	0.01			$	0.01
Diluted		$	0.01			$	0.01
Weighted average number of common shares outstanding:
Basic			23,813,295				23,590,662
Diluted			23,981,133				23,813,108

 

The accompanying notes are an integral part of these financial statements.

 

 

Where Food Comes From, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

 

		Year to date periods ended
		September 30,				September 30,
		2015				2014
Revenues:
Service revenues		$	6,576,781			$	5,060,375
Product sales			951,556				786,009
Other revenue			84,999				107,487
Total revenues			7,613,336				5,953,871
Costs of revenues:
Labor and other costs of services			3,403,398				2,804,361
Costs of products			573,759				527,702
Total costs of revenues			3,977,157				3,332,063
Gross profit			3,636,179				2,621,808
Selling, general and administrative expenses			3,120,379				2,404,776
Income from operations			515,800				217,032
Other expense (income):
Interest expense			1,253				9,325
Other income, net			(6,721	)			(1,982	)
Income before income taxes			521,268				209,689
Income tax expense			213,285				97,131
Net income			307,983				112,558
Net loss attributable to non-controlling interest			72,584				52,340
Net income attributable to Where Food Comes From, Inc.		$	380,567			$	164,898
Net income per share:
Basic		$	0.02			$	0.01
Diluted		$	0.02			$	0.01
Weighted average number of common shares outstanding:
Basic			23,791,825				22,996,399
Diluted			23,972,897				23,224,678

 

 

The accompanying notes are an integral part of these financial statements.

  

 

 

 

Where Food Comes From, Inc.

Condensed Consolidated Statements of Cash Flow

(Unaudited)

 

		Year to date periods ended September 30,
		2015				2014
Net cash provided by operating activities		$	1,383,239			$	521,041
Investing activities:
Acquisition of International Certification Services, Inc., remaining interest			—				(195,926	)
Purchase of other intangible assets			—				(81,000	)
Purchases of property and equipment			(22,779	)			(62,104	)
Net cash used in investing activities			(22,779	)			(339,030	)
Financing activities:
Repayments of notes payable			(5,555	)			(165,066	)
Repayments of capital lease obligations			(3,275	)			(3,110	)
Restricted cash for line of credit collateral			—				(250,000	)
Proceeds from stock option exercise			50,589				7,200
Proceeds from issuance of common stock			—				1,800,000
Net cash provided by financing activities			41,759				1,389,024
Net change in cash and cash equivalents			1,402,219				1,571,035
Cash and cash equivalents at beginning of period			2,583,058				1,067,537
Cash and cash equivalents at end of period		$	3,985,277			$	2,638,572

 

 The accompanying notes are an integral part of these financial statements.

 

 

 

 

Where Food Comes From, Inc.

Condensed Consolidated Statement of Equity

Year to date period ended September 30, 2015

(Unaudited)

 

 

		Where Food Comes From, Inc.
										Additional
		Common Stock								Paid-in				Treasury				Accumulated
		Shares				Amount				Capital				Stock				Deficit				Total
Balance at December 31, 2014			23,720,130			$	24,266			$	7,428,754			$	(150,849	)		$	(1,092,005	)		$	6,210,166
Stock-based compensation expense			—				—				83,576				—				—				83,576
Issuance of common shares upon exercise of options			93,165				93				50,496				—				—				50,589
Retirement of treasury shares							(546	)			(150,303	)			150,849				—				—
Net income			—				—				—				—				380,567				380,567
Balance at September 30, 2015			23,813,295			$	23,813			$	7,412,523			$	—			$	(711,438	)		$	6,724,898

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

Where Food Comes From

Notes to the Condensed Consolidated Financial Statements 

 

Note 1 - The Company and Basis of Presentation

 

Business Overview

  

Where Food Comes From, Inc. is a Colorado corporation based in Castle Rock, Colorado (the “Company,” “WFCF”, “our,” “we,” or “us”). We provide verification and certification solutions for the agriculture, livestock and food industry. Most of our customers are located throughout the United States.

 

On February 29, 2012, we completed an acquisition of a 60% ownership investment in a North Dakota company, International Certification Services, Inc. (“ICS”). On March 1, 2014, the Company exercised its call option to purchase the remaining 40% interest of the stock of ICS (Note 2).

 

On September 16, 2013, we acquired the auditing business of Praedium Ventures, LLC, previously known as Validus Ventures, LLC (“Validus”) (Note 2). This acquisition was accounted for using the acquisition method of accounting and, accordingly, its results are included in the Company’s consolidated financial statements from the date of acquisition.

 

On October 24, 2014, we acquired certain audit, assessment and verification business assets of Sterling Solutions, LLC (“Sterling”).

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the results of operations, financial position and cash flows of Where Food Comes From, Inc. and its majority-owned subsidiaries, ICS, Validus and Sterling (collectively referred to as “we,” “us,” and “our” throughout this Form 10-Q). All intercompany balances have been eliminated.

 

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (”SEC”) and should be read in conjunction with our audited financial statements and footnotes thereto for the year ended December 31, 2014, included in our Form 10-K filed on February 18, 2015. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations. The consolidated operating results for the periods ended September 30, 2015 are not necessarily indicative of the results to be expected for any other interim period of any future year.

 

Seasonality

 

Our business is subject to seasonal fluctuations. Significant portions of our revenues are typically realized during the second and third quarters of the fiscal year when the calf marketings and the growing seasons are at their peak. Because of the seasonality of the business and our industry, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts from Customers, which supersedes the revenue recognition in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.  In July 2015, the FASB delayed the effective date by one year. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the effective date of December 15, 2016.  The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.

 

 

Where Food Comes From

Notes to the Condensed Consolidated Financial Statements 

 

 

We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current year presentation. Net loss and shareholders' equity were not affected by these reclassifications.

 

 

Note 2 – Business Acquisitions

 

Sterling Acquisition

 

On October 24, 2014, an Asset Purchase Agreement (the “Purchase Agreement”) was entered into by and among WFCF, Sterling Solutions, LLC (“Sterling” or “the Seller”), and certain affiliates of the Seller.

 

Pursuant to the Purchase Agreement, WFCF purchased and acquired customer relationships and trademarks of the Seller as of October 24, 2014 for aggregate consideration of $251,000, which included $150,000 in cash and 42,096 shares (the “Shares”) of common stock of WFCF valued at approximately $101,000 based upon the closing price of our stock on October 24, 2014, of $2.40 per share. The transaction was accounted for under the acquisition method of accounting and the purchase price was allocated primarily all to customer relationships, based on estimated fair value.

 

Validus Acquisition

 

On September 16, 2013, we entered into an Asset Purchase and Contribution Agreement (the “Purchase Agreement”), by and among the Company, Validus Verification Services LLC (the “Buyer” or “Validus”), and Praedium Ventures, LLC (the “Seller”).

 

In connection with this transaction, the Seller was also issued a 40% interest in Validus, with the Company holding a 60% interest. The Company has the first right of refusal on the remaining 40% of the outstanding stock.

 

At any time following the thirty-month anniversary of the effective date of the Purchase Agreement, the Company shall have the option, but not the obligation, to purchase all the units (the 40% interest) of Validus held by Praedium, and Praedium shall have the option, but not the obligation, to require the Company to purchase all the units of Validus held by Praedium. The purchase price for the units shall be equal to the amount the selling holders of the units would be entitled to receive upon a liquidation of the Validus assuming all of the assets of Validus are sold for a purchase price equal to the product of eight and half times trailing twelve-month earnings before income taxes, depreciation and amortization, as defined.

 

Because Praedium, at its option, can require the Company to purchase its 40% interest in Validus, the Validus non-controlling interest meets the definition of a contingently redeemable non-controlling interest.

 

Redeemable non-controlling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period and are shown as a separate caption between liabilities and equity (mezzanine section) in the accompanying balance sheet (Note 10).

 

 

Where Food Comes From

Notes to the Condensed Consolidated Financial Statements

 

ICS Acquisition of Remaining Interest

 

On March 1, 2014, the Company exercised its call option to purchase the remaining 40% interest of the stock of ICS in exchange for cash consideration of approximately $196,000, pursuant to the Purchase Agreement, dated February 29, 2012. The carrying amount of the non-controlling interest was adjusted to $0 to reflect the change in the Company’s ownership interest up to 100%. The difference between the fair value of the consideration paid and the carrying value of the non-controlling interest on the date of the transaction was adjusted to equity.

 

 

Note 3 - Basic and Diluted Net Income per Share

 

Basic net income per share was computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

The following schedule is a reconciliation of the share data used in the basic and diluted net income per share computations:

 

		Quarter ended								Year to Date ended
		September 30,				September 30,				September 30,				September 30,
		2015				2014				2015				2014
Basic:
Weighted average shares outstanding			23,813,295				23,590,662				23,791,825				22,996,399
Diluted:
Weighted average shares outstanding			23,813,295				23,590,662				23,791,825				22,996,399
Weighted average effects of dilutive securities			167,838				222,446				181,072				228,279
Total			23,981,133				23,813,108				23,972,897				23,224,678
Antidilutive securities:			95,834				22,500				75,334				22,500

 

The effect of the inclusion of the antidilutive shares would have resulted in an increase in earnings per share. Accordingly, the weighted average shares outstanding have not been adjusted for antidilutive shares.

 

 

Where Food Comes From

Notes to the Condensed Consolidated Financial Statements

 

 

Note 4 – Intangible Assets and Other Assets

 

The following table summarizes our intangible and other assets:

 

 

		September 30,				December 31,				Estimated
		2015				2014				useful life
Intangible assets subject to amortization:
Tradenames/Trademarks		$	64,307			$	64,307			2.5- 8.0 years
Accreditations			88,663				88,663				5.0 years
Customer Relationships			1,401,330				1,401,330				8.0 - 15.0 years
Beneficial Lease Arrangement			120,200				120,200				11.0 years
			1,674,500				1,674,500
Less accumulated amortization			315,308				236,822
			1,359,192				1,437,678
Tradenames/trademarks (not subject to amortization)			465,000				465,000				indefinite
			1,785,422				1,902,678
Deposits			13,545				50,000
Intangible and other assets, net		$	1,798,967			$	1,952,678

 

 

Note 5 - Stock-Based Compensation

 

Our stock-based award plans (collectively referred to as the “Plans”) provide for the issuance of stock-based awards to employees, officers, directors and consultants. The Plans permit the granting of stock awards and stock options. The vesting of stock-based awards is generally subject to meeting certain performance-based objectives, the passage of time or a combination of both, and continued employment through the vesting period.

 

The fair value of stock options is estimated using the Black-Scholes option-pricing model, which incorporates ranges of assumptions for inputs. Our assumptions are as follows:

 

•

Dividend yield is based on our historical and anticipated policy of not paying cash dividends.

•

Expected volatility assumptions were derived from our actual volatilities.

•

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant with maturity dates approximately equal to the expected term at the grant date.

•

The expected term of options represents the period of time that options granted are expected to be outstanding giving consideration to vesting schedules, based on historical exercise patterns, which we believe are representative of future behavior.

 

There were no options to purchase common stock and 74,000 restricted stock units granted for the quarter ended September 30, 2015. For the year to date period ended September 30, 2015 no options to purchase shares of common stock and 83,000 shares of restricted stock units were granted. These restricted stock units had a weighted average grant date fair value of $2.68 and vest over a weighted average period of 2.67 years. Unrecognized compensation expense related to these restricted stock units at September 30, 2015, is approximately $195,400. For the quarter and year to date period ended September 30, 2014, options to purchase 3,334 and 30,334 shares of common stock were granted, respectively. Stock-based compensation expense for the third quarters ended September 30, 2015 and 2014 was approximately $33,535 and $25,900, respectively. Stock-based compensation expense for the year to date periods ended September 30, 2015 and 2014 was approximately $83,576 and $71,300, respectively. Stock-based compensation expense has been included in general and administrative expenses.

 

 

Where Food Comes From

Notes to the Condensed Consolidated Financial Statements

 

 

Note 6 – Equity Incentive Plan

 

Activity under our Equity Incentive Plan is summarized as follows:

 

				Number of Options/Warrants				Weighted Avg. Exercise Price per Share				Weighted Avg. Fair Value per Share				Weighted Avg. Remaining Contractual Life (in years)				Aggregate Intrinsic Value
Outstanding, December 31, 2014					359,168			$	0.76			$	0.71				6.58			$	768,869
Granted					—			$	—			$	—				—
Exercised					(93,165	)		$	0.54			$	0.33				3.79
Canceled					—			$	—			$	—				—
Outstanding, September 30, 2015					266,003			$	0.84			$	0.85				6.68			$	442,879
Exercisable, September 30, 2015					221,830			$	0.73			$	0.73				6.44			$	396,139

 

The aggregate intrinsic value represents the total pre-tax intrinsic value (the aggregate difference between the closing price of our common stock on September 30, 2015 and the exercise price for the in-the-money options) that would have been received by the option holders if all the in-the-money options had been exercised on September 30, 2015.

 

				Number of Options				Weighted Avg Grant Date Fair Value
Non-vested options, December 31, 2014					105,843			$	1.33
Granted					—			$	—
Vested					(61,670	)		$	1.26
Forfeited					—			$	—
Non-vested options, September 30, 2015					44,173			$	1.43

 

Unrecognized compensation expense at September 30, 2015, was approximately $41,500.

 

Note 7 – Income Taxes

 

Deferred tax assets and liabilities have been determined based upon the differences between the financial statement amounts and the tax bases of assets and liabilities as measured by enacted tax rates expected to be in effect when these differences are expected to reverse. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our net operating loss (“NOL”) carry forwards are the most significant component of our deferred tax assets; however, the ultimate realization of our deferred tax assets is dependent upon generation of future taxable income. We consider past history, the scheduled reversal of taxable temporary differences, projected future taxable income, and tax planning strategies in making this assessment. Utilization of our NOL carry forwards reduces our federal and state income tax liability incurred.

 

The Company’s subsidiary, Validus, is a Colorado limited liability company (LLC). As an LLC, management believes Validus is not subject to income taxes, and such taxes are the responsibility of the respective members.

 

 

Where Food Comes From

Notes to the Condensed Consolidated Financial Statements

 

 

The provision (benefit) for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the third quarters ended September 30, 2015 and 2014, we recorded income tax expense of $92,000 and $143,940, respectively. For the year to date periods ended September 30, 2015 and 2014, we recorded income tax expense of $213,285 and $97,131, respectively. The difference between the expected tax expense and the effective tax expense is due to the tax effects of the non-controlling interest.

 

 

Note 8 - Notes Payable

 

Equipment Note Payable

 

In December 2012, we entered into a note payable of $37,407 for the purchase of a vehicle. Interest and principal payments are due in equal monthly installments of $715 over five years beginning January 2013. This note bears an interest rate of 5.5% per annum and is collateralized by the vehicle.

 

The current and non-current portion of the equipment note payable is as follows:

 

		September 30,				December 31,
		2015				2014
Equipment note payable		$	18,115			$	23,670
Less current portion of note payable			7,739				7,425
Note payable		$	10,376			$	16,245

 

 

WFCF Revolving Line of Credit

 

On September 2, 2014, WFCF entered into a Business Loan Agreement (the “Agreement”) and a related promissory note (the “Note”) for a revolving line of credit with Castle Rock Bank. The term of the Agreement was until September 2, 2015, and provided for advances up to $500,000. The interest rate on any amounts borrowed under the Agreement was 3.75% per annum, payable monthly. All amounts borrowed under the Agreement and the Note were to be repaid by September 2, 2015 and could be prepaid without penalties. The Agreement contained certain customary affirmative and negative covenants. There were no amounts borrowed under this line of credit. On May 8, 2015, the Company terminated this Agreement without penalty.

The Note was secured by a certificate of deposit in the amount of $250,000, which was included in restricted cash, and a security interest in 500,000 shares of WFCF common stock. The 500,000 shares are personally owned by John and Leann Saunders, significant shareholders, officers and members of the Company’s Board of Directors. Upon termination of the Agreement, the certificate of deposit was released from restriction and is included in cash and cash equivalents at September 30, 2015.

 

ICS Revolving Line of Credit

 

ICS has a revolving line of credit (LOC) agreement which matures April 1, 2017. The LOC provides for $70,050 in working capital. The interest rate is at the New York prime rate plus 2.250% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on maturity. As of September 30, 2015, the effective interest rate was 6.25%. The LOC is collateralized by all the business assets of ICS. As of September 30, 2015, ICS had no amounts outstanding under this LOC.

 

 

 

Where Food Comes From

Notes to the Condensed Consolidated Financial Statements

 

 

Note 9 - Commitments and Contingencies

 

Operating Leases

 

The Company leases a building for our headquarters in Castle Rock, Colorado. This lease is for a period of three years and expired on June 15, 2015. The lease was renewed effective June 15, 2015 for a nine month term. In addition to the primary rent, the lease requires additional payments for operating costs and other common area maintenance costs.

 

In connection with the Validus acquisition, the Company entered into a related-party lease agreement for its office space with Praedium (the non-controlling interest holder). The lease is for a period of three years, expiring October 31, 2016, and requires rental payments of approximately $2,600 per month. There is no renewal feature. In addition to primary rent, the lease requires additional payments for operating costs and other common area maintenance costs.

 

The Company also owns approximately ¾ acre on which a 2,300 square foot building is located in Medina, North Dakota. The Company leases space in this building under a 5-year lease with an expiration date of March 1, 2018. One additional option to renew for a 5-year term exists and is deemed to automatically renew unless written notice is provided 60 days before the end of the term. The Company is charged a monthly rental rate of approximately $150 plus all utilities, taxes and other expenses based on actual expenses to maintain the building.

 

As of September 30, 2015, future minimum lease payments are as follows:

 

 

Years ended December 31,			Amount
2015 (remaining three months)			$	27,155
2016				46,564
2017				1,818
2018				303
Total lease commitments			$	75,840

 

 

Capital Leases

 

The Company has a capital lease for certain office equipment with a base rent of $405 per month. This 63-month lease expires in April 2017. Approximately $22,300 in asset cost has been included in property and equipment and is being amortized over 63 months. Imputed interest of 5.25% was used in determining the minimum lease payments.

 

 

Where Food Comes From

Notes to the Condensed Consolidated Financial Statements

 

 

As of September 30, 2015, future minimum lease payments for capital leases are as follows:

 

Years Ending December 31,		Amount
2015 (remaining three months)		$	1,215
2016			4,860
2017			1,797
Future minimum lease payments			7,872
Less amount representing interest			(340	)
Present value of net minimum lease payments			7,532
Less current portion			(4,574	)
Capital lease obligations		$	2,958

 

 

Legal proceedings

 

From time to time, we may become involved in various legal actions, administrative proceedings and claims in the ordinary course of business. We generally record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable. We are not aware of any legal actions currently pending against us.

 

 

Note 10 – Contingently Redeemable Non-controlling Interest

 

Contingently redeemable non-controlling interest on our condensed consolidated balance sheet represents the non-controlling interest related to the Validus acquisition, in which the non-controlling interest holder, at its election, can require the Company to purchase its 40% investment in Validus. Below is a table reflecting the activity of the contingently redeemable non-controlling interest at September 30, 2015:

 

Balance, December 31, 2014			$	974,019
Loss for three-month period ended September 30, 2015				(72,584	)
Balance, September 30, 2015			$	901,435

 

 

The contingently redeemable non-controlling interest is adjusted to the greater of the carrying value or redemption value as of each period end.

 

 

Note 11 – Supplemental Cash Flow Information

 

		None month period ended September 30,
			2015				2014
Cash paid during the period:
Interest		$	881			$	5,344

 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Form 10−K for the fiscal year ended December 31, 2014. The following discussion and analysis includes historical and certain forward−looking information that should be read together with the accompanying condensed consolidated financial statements, related footnotes and the discussion below of certain risks and uncertainties that could cause future operating results to differ materially from historical results or from the expected results indicated by forward−looking statements.

 

Business Overview

 

Where Food Comes From, Inc. is a leading provider of verification and communication solutions for the agriculture, livestock and food industry. We provide our owned and operated online products and services which specialize in identification and traceability, process/production-practice/supply verification, document control for the United States Department of Agriculture (“USDA”) and other verification programs and third party auditing services. Our services ensure compliance with governmental and private standards by providing transparency and value in food products for both producers and consumers worldwide.

 

In late 2012, we changed our corporate name from Integrated Management Information, Inc. (“IMI”) to Where Food Comes From, Inc. to better reflect our brand strategy and to raise awareness in the investor community. We are listed on the over-the-counter electronic bulletin board (“OTC:BB”) under the stock ticker symbol “WFCF.”

 

Current Marketplace Opportunities

 

We believe the following marketplace opportunities will drive our business forward effectively increasing consumer demand for third party verification services:

 

•

One-fourth of the world's beef and nearly one-fifth of the world's grain, milk and eggs are produced in the United States. With increased consumer consciousness, Americans are demanding to know where their food comes from and how they can support development of local and regional food systems. We believe that as consumers become better educated they will have more confidence in their food purchase decisions. Consumer demand continues to promote growth of our “Where Food Comes From®” labeling program.

 

•

There is a growing interest in the sustainability of the global beef value chain – its production and supply chain practices, policies and technologies. In May 2014, we joined the Global Roundtable for Sustainable Beef.   Our involvement with this group has provided opportunities to work with those in the food service industry who are interested in this issue.

 

•

According to the USDA website, the U.S. market for certified organic products was estimated at more than $39 billion as of October 2015 while USDA-approved organic operations have grown more than 250% since 2002. Increasing consumer demand for healthy, better-for-you products produced with sustainable agricultural practices is driving growth in the organic market. Additionally, specialty food-store chains, conventional grocery store chains and big box retailers are allocating more shelf space to organic products in order to meet the growing demand. Our acquisition of ICS in February 2012 created a strategic transaction offering major participants in the food and agriculture industries a comprehensive range of verification services for the major food groups through a single platform.

 

 

 

•

In January 2013, the Food Safety Modernization Act (FSMA) issued two major proposed rules regarding preventive controls in human food and produce safety. Compliance dates for some businesses begins in September 2016. The most anticipated element of FSMA was the requirement that all Food and Drug Administration (FDA) regulated food companies develop and implement written food safety plans. The rule on preventive controls for human food (i.e., requiring written food safety plans) applies to all facilities that manufacture, process, pack or hold human food. We have begun to see significant movement in companies requesting our consulting expertise to developing programs designed to assist them in maintaining compliance with the new rules.

 

•

In March 2013, the USDA mandated the Animal Disease Traceability Rule primarily covering cattle 18 months of age or older. This ruling solidified the need for beef producers to participate in a national animal identification program. In December 2013, the USDA announced a final rule establishing general regulations for improving the traceability of U.S. livestock moving interstate. Under the final rule, unless specifically exempted, livestock moved interstate would have to be officially identified and accompanied by an interstate certificate of veterinary inspection or other documentation, such as owner-shipper statements or brand certificates. This ruling solidifies the need for beef producers to participate in a national animal identification program. This has presented a significant opportunity for our business. As a result, we have been participating in an industry-led coalition to offer private industry solutions for this ruling.

 

•

In July 2013, the FDA issued rules on importer foreign supplier verification and accreditation of third-party auditors. The first rule establishes the Foreign Supplier Verification Program (FSVP), which requires importers of food to analyze any hazards related to the imported food. If hazards exist, the importer must verify that the hazards are controlled through a third party audit. The second rule establishes an accreditation program for third party certification bodies to conduct food safety audits of foreign facilities. The accredited third parties will verify the safety of imports with FDA oversight. These rules help to ensure that imported foods meet the same safety standards that domestic foods do. Food safety is extremely important to all of us. It seems that the timing of our acquisition of the Validus auditing business in September 2013 couldn’t be better. Validus received the ISO 65 accreditation to provide Safe Quality Food certifications to specific segments of the food industry and is working toward ISO 17065 accreditation.

 

•

In October 2013, the FDA released its proposed rules for preventative controls for animal food. Compliance dates for some businesses begins in September 2016. The rules take animal feed and pet food regulation a step closer to human food regulations. Over the past few years food related illnesses, such as listeria and salmonella, were not unique to humans. At the same time, there were issues with arsenic in dog food, and most recently death from jerky treats. The rules for animal food controls call on the industry to enact many of the practices that are required of producers and processers of human food. Most notably is the requirement for conducting a Hazard Analysis, establishing controls for identified hazards and enacting monitoring, verification and record keeping protocols. To many, this brings to mind a Hazard Analysis and Critical Control Point or HACCP Plan. We believe that in connection with the Validus and Sterling acquisitions, we are in a dominant market position. Both Validus and Sterling provide a variety of services in order to verify responsible animal Care and Wellbeing, environmental, on-farm security, and worker care production practices. Additionally, Validus owns the Facility Certification Institute and their extensive work and wide range of experience in the animal feed and pet food arena is well recognized.

 

 

Current Concerns in our Industry 

 

U.S. beef has been largely absent from the EU for the past 20+ years due to an EU ban on hormone-treated meat and meat products. In late 2009, the EU announced an annual duty-free quota of 20,000 metric tons for high-quality beef from cattle not treated with growth hormones (“NHTC”). In March 2012, the EU expanded the annual duty-free quota from 20,000 metric tons to 48,200 metric tons. In October 2013, the U.S. signed an extension to the existing trade agreement with the European Union regarding zero-tariffs for beef from non-hormone treated cattle, which means that demand for NHTC will continue. NHTC requires third party verification, but with duty-free access lowering the cost of doing business in Europe, we believe that it offers significantly more potential for third party NHTC verification services and our product line, High Quality Beef verification services; however, due to the current strength of the US dollar, we are seeing downward pressure on NHTC cattle prices causing the momentum of these programs to slow.

 

 

In early 2014, Porcine Epidemic Diarrhea Virus (PEDv) negatively impacted the pork/sow industry. The total number of known positive PEDv laboratory swine accessions grew rapidly each week with no vaccines against the virus. In February 2014, in order to prevent the spread of PEDv, the USDA published a request that pig farmers submit accurate on-farm inventory, birth, and death rates in an effort to minimize persons sent to farms to collect data. While the impact of this news significantly delayed the number of onsite pork verifications scheduled in 2014, we believe that we have diversified our product offerings such that the impact was not catastrophic to our 2014 annual consolidated results, nor do we believe it will be significant to our 2015 results. 

 

Highly Pathogenic Avian Influenza, more commonly known as Bird Flu, refers to strains of influenza that primarily affect several types of birds, including farmed poultry, i.e. chickens, geese, turkeys and ducks. The virus spreads through infected birds, via their saliva, nasal secretions, feces, and feed. According to ThePoultrySite.com, on April 29, 2015, poultry movements in North Dakota were limited to control the spread of avian influenza in the state following two recent outbreaks in commercial poultry. As a result of this news release, the virus delayed the number of onsite verifications performed, and negatively impacted supplies, including eggs. During second quarter 2015, we received a delay notification in our verification schedule from one of our egg producers. We have proposed an acceptable solution; however, more recently several other state poultry associations in the South are bracing for potential outbreaks. Autumn and winter months bring the possibility that migrating wild birds will carry the virus to the lower half of the United States. At this time we have no way to reasonably estimate the impact it could have on our business. However, we believe we have diversified our product offerings such that the impact is not expected to be significantly material to our 2015 consolidated results.

 

We believe that our experience in bio-security considerations and the core competency needed to deal with infectious diseases gives us a competitive advantage creating a barrier to entry for less sophisticated third-party verification companies.

 

Seasonality

 

Our business is subject to seasonal fluctuations. Significant portions of our revenues are typically realized during the second and third quarters of the fiscal year when the calf marketings and the growing seasons are at their peak. Because of the seasonality of the business and our industry, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

 

Liquidity and Capital Resources

 

At September 30, 2015, we had cash and cash equivalents of $3,985,277 compared to $2,583,058 of cash and cash equivalents at December 31, 2014. Our working capital at September 30, 2015 was $4,294,104 compared to $3,380,717 at December 31, 2014.

 

Net cash provided by operating activities for the nine months ended September 30, 2015 was approximately $1,383,200 compared to net cash provided of approximately $521,000 during the same period in 2014. Net cash provided by operating activities is driven by our net income (loss) and adjusted by non-cash items. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock based compensation expense and deferred taxes.

 

Net cash used in investing activities for the nine month period ended September 30, 2015 was approximately $22,800 compared to approximately $339,000 used in the 2014 period. Net cash used in the nine month period ended September 30, 2015 period was attributable to the purchases of property and equipment. Net cash used in the 2014 period was primarily attributable to the acquisition of the remaining 40% interest in ICS in which we paid $195,900 in cash as well as acquiring certain intangible assets of Global Animal Management, Inc. for cash of $65,000.

 

 

Net cash provided by financing activities for the nine month period ended September 30, 2015 was approximately $41,800 compared to cash provided of $1,389,000 in the 2014 period. Net cash provided in the nine month period ended September 30, 2015 was due to stock option exercises of approximately $50,600 offset by repayments of debt and lease obligations of approximately $8,800. Net cash provided in the same period of 2014 was due to $7,200 in proceeds from stock option exercises and proceeds from issuance of common stock of $1,800,000 offset by repayments of debt and lease obligations of approximately $169,200.

 

Historically, our growth has been funded through a combination of convertible debt from private investors and private placement offerings. We continually evaluate all funding options including additional offerings of our securities to private, public and institutional investors and other credit facilities as they become available. On July 1, 2014, we completed the sale of 900,000 shares of our common stock to two investors which resulted in approximately $1,800,000 in cash proceeds.

 

The primary driver of our operating cash flow is our third-party verification solutions, specifically the gross margin generated from services provided. Therefore we focus on the elements of those operations including revenue growth and long term projects that ensure a steady stream of operating profits to enable us to meet our cash obligations. On a weekly basis we review the performance of each of our revenue streams focusing on third party verification solutions compared with prior periods and our operating plan. We believe that our various sources of capital, including cash flow from operating activities, overall improvement in our performance, and our ability to obtain additional financing are adequate to finance current operations as well as the repayment of current debt obligations. We are not aware of any other event or trend that would negatively affect our liquidity. In the event such a trend develops, we believe that there are sufficient financing avenues available to us and from our internal cash generating capabilities to adequately manage our ongoing business.

 

The culmination of all our efforts toward net income has brought opportunities to us including: increased investor confidence and renewed interest in our company, third-party interest in our expertise, as well as the potential to develop business relationships with long term strategic partners. In keeping with our core business, we will continue to review our business model with a focus on profitability, long term capital solutions and the potential impact of acquisitions or divestitures, if such an opportunity arises.

 

Our plan for continued growth is primarily based upon acquisitions as well as intensifying our focus on international markets. We believe that there are significant growth opportunities available to us because often the only means to entry as imposed on international market imports/exports is via a quality verification program.

 

Debt Facility

 

On September 2, 2014, WFCF entered into a Business Loan Agreement (the “Agreement”) and a related promissory note (the “Note”) for a revolving line of credit with Castle Rock Bank. The term of the Agreement was until September 2, 2015, and it provided for advances up to $500,000. The interest rate on any amounts borrowed under the Agreement was 3.75% per annum, payable monthly. All amounts borrowed under the Agreement and the Note must be repaid by September 2, 2015 and could be prepaid without penalties. The Agreement contains certain customary affirmative and negative covenants. The Company terminated this agreement without penalty on May 8, 2015.

 

ICS has a revolving line of credit (LOC) agreement which was renewed on April 1, 2014 and matures April 1, 2017. The LOC provides for $70,050 in working capital. The interest rate is at the New York prime rate plus 2.250% and is adjusted daily. Principal and interest are payable upon demand, but if demand is not made, then annual payments of accrued interest only are due, with the principal balance due on maturity. The LOC is collateralized by all the business assets of ICS.

 

 

 

Corporate Headquarters Operating Lease

 

Management has been informed that a change of ownership has occurred in the building currently under a lease agreement for the corporate headquarters in Castle Rock, Colorado. The lease agreement was renewed effective June 15, 2015 for a nine month term ending March 31, 2016.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2015, we had no off-balance sheet arrangements of any type.   

 

 

RESULTS OF OPERATIONS

 

Third quarter and Year to Date Period Ended September 30, 2015 Compared to the Same Periods in Fiscal Year 2014

 

Revenues

 

Total revenues for the third quarter ended September 30, 2015 increased 18.4% compared to the same period in 2014. Total revenues for the year to date period ended September 30, 2015 increased 27.9% compared to the same period in 2014.

 

Service revenues include sales of our USVerified solutions and related consulting, program development and web-based development services. Service revenues for the quarter ended September 30, 2015, of approximately $2,655,800 increased approximately $516,500 or 24.1% compared to the same period in 2014. For the year to date period ended September 30, 2015, service revenues of approximately $6,576,800 increased approximately $1,516,400 or 30.0% compared to the same period in 2014. Overall, the increase is due to both an increase in new verification customers, as well as an increase in product offerings.

 

Product sales represent sales of cattle identification ear tags. Product sales of approximately $371,700 for the third quarter ended September 30, 2015 decreased approximately $42,800 or 10.3% compared to the same period in 2014. The 2014 period consisted of a significant influx of new customers from immaterial acquisitions. For the year to date period ended September 30, 2015, product revenues of approximately $951,600 increased approximately $165,500 or 21.1%. Overall, the increase is due to an increase in the number of customers as well as an increase in average number of identification tags sold to each customer.

 

Other revenue primarily represents the fees earned from our WFCF labeling program. Other revenue of approximately $25,400 for the third quarter ended September 30, 2015 decreased $200 or 1.0% compared to the same period in 2014. For the year to date period ended September 30, 2015, other revenue of approximately $85,000 decreased $22,500 or 20.9% compared to the same period in 2014. The decrease is due to a change in beef suppliers at one of our major customers. Congruent with the integrity reflected in all of our programs, this customer made the decision to pull the WFCF label from its beef products until an acceptable alternate verified beef supplier can be found. This customer’s licensing revenue from beef alone made up nearly half of our licensing revenue historically. We are working to fully restore the licensing revenue generated by a verified beef source. In the meantime, we have partially offset the loss of this revenue with the addition of new customers and new product lines for our existing customers.

 

Cost of Revenues and Gross Margin

 

Cost of revenues for the third quarter ended September 30, 2015 was approximately $1,579,100 compared to approximately $1,399,800 during the same period in 2014. Cost of revenues for the year to date period ended September 30, 2015 was approximately $3,977,200 compared to approximately $3,332,100 during the same period in 2014. Gross margin for the third quarter ended 2015 improved slightly to 48.3% of revenues compared to 45.7% of revenues for the third quarter ended 2014. Gross margin for the year to date period ended September 30, 2015 improved slightly to 47.8% of revenues compared to 44.0% of revenues in the same period in 2014. Overall the improvement is due to absorption of costs over a higher sales base, as well as a slight change in product mix coupled with bundling opportunities where we can provide multiple verifications and/or certifications with one site visit.

 

 

Our margins are impacted by various costs such as cost of products, salaries and benefits, insurance, and taxes. Because certain elements of our cost of revenues are fixed in nature, incremental sales positively impact our margins.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the third quarter 2015 were approximately $1,171,500, an increase of approximately $396,500, or 51.2% over the third quarter ended 2014.  Selling, general and administrative expenses for the year to date period ended September 30, 2015 were approximately $3,120,400, an increase of approximately $715,600 or 29.8% compared to the same period in 2014.  Overall, the increase in our selling, general and administrative expenses is due in part to higher head count, increased sales and marketing costs, bonus accruals related to meeting certain financial milestones, and higher costs related to being a publicly held company. In addition, the Company is making significant investments in IT process redesigns related to the integration and standardization of differing field audit and accounting methodologies used by the IMI Global, ICS and Validus business units. 

 

Income Tax Expense

 

The provision (benefit) for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the third quarters ended September 30, 2015 and 2014, we recorded income tax expense of approximately $92,000 and $143,900, respectively. For the year to date periods ended September 30, 2015 and 2014, we recorded income tax expense of $213,300 and $97,100, respectively. The difference between the expected tax expense and the effective tax expense is due to the tax effects of the non-controlling interest.

 

Net Income and Per Share Information

 

As a result of the foregoing, net income attributable to WFCF shareholders for the third quarter ended September 30, 2015 was approximately $181,600, or $0.01 per basic and diluted common share, compared to approximately $245,100, or $0.01 per basic and diluted common share for the third quarter ended September 30, 2014. Net income attributable to WFCF shareholders for the year to date period ended September 30, 2015 was approximately $380,600, or $0.02 per basic and diluted common share, compared to approximately $164,900, or $0.01 per basic and diluted common share for the year to date period ended September 30, 2014.

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rule 13a-15(e) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective based on our evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

 

Internal Control Over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

From time to time, we may become involved in various legal actions, administrative proceedings and claims in the ordinary course of business. We generally record losses for claims in excess of the limits of purchased insurance in earnings at the time and to the extent they are probable and estimable.

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2014 Annual Report on Form 10−K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of September 30, 2015, there have been no material changes to the risks disclosed in our most recent Annual Report on Form 10−K. We may also disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

 

ITEM 6. EXHIBITS

 

(a) Exhibits

 

Number		Description
31.1		Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: October 29, 2015	Where Food Comes From, Inc.
	By:	/s/ John K. Saunders
		Chief Executive Officer

 

	By:	/s/ Dannette Henning
		Chief Financial Officer